CME Lawsuit Could Redefine 'Trading Floor' in the Age of Electronic Markets
A high-stakes legal battle is underway in downtown Chicago, where a class of longtime traders is suing CME Group—the operator of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT)—over allegations that it breached contractual rights tied to legacy trading floor memberships.
Opening statements in the case began on July 7, before Cook County Circuit Judge Patrick J. Sherlock at the Richard J. Daley Center.
At the heart of the lawsuit is a dispute over how CME's transition to electronic trading more than a decade ago affected the rights of B-share members. These memberships historically granted traders access to fee discounts and trading privileges on physical exchange floors.
Plaintiffs allege that CME's 2010 launch of its Aurora data center—and the 2012 migration of most trading volume to that site—stripped them of contractual benefits and devalued their ownership stakes.
According to an article from Wall Street Journal (WSJ), the plaintiffs are seeking over $1 billion in damages, with some estimates placing the potential liability as high as $2 billion plus interest. They argue that CME's restructuring favored non-member electronic traders, some of whom now pay lower trading fees than legacy members—a reversal of longstanding privileges granted under B-share ownership.
WSJ stated that B-share prices have reportedly dropped from a peak of $1.6 million in 2008 to between $875,000 and $1.5 million in recent years.
In an e-mail exchange with Traders Magazine, CME Group declined to comment.
The trial is expected to last several weeks. A ruling in favor of the plaintiffs could have wide-reaching consequences.
James J. Angel, Associate Professor Academic Director, FINRA Certified Regulatory and Compliance Professional (CRCP (r)) Program at Georgetown University explained that the lawsuit is fundamentally about the interpretation of the contract between CME and the Class B shareholders, the plaintiffs.
The plaintiffs allege that their contract with the CME gives them trading floor privileges, and that those privileges extend to the electronic trading system, he told Traders Magazine.
James J. Angel
The plaintiffs allege that by allowing non Class B shareholders to access the electronic system, and by charging fees to the Class B shareholders who want to use the electronic system, the CME has violated its contract and harmed the Class B shareholders, Prof. Angel said.
"The Class B shareholders want CME to pay and pay big for the alleged damage," he stressed.
Prof. Angel believes this case is a specialized one-off case that will be determined by the specific details of the contract between the CME and its Class B shareholders.
"Other exchanges, most notably the NYSE, demutualized a long time ago with different legal structures. I suspect that the details of the other demutualizations are sufficiently different that the CME case won't set much of a precedent with one possible exception: The definition of a trading floor," he said.
"The case revolves around the promise to grant trading floor rights to the old floor traders. Do any rules or contracts regarding a trading floor also apply to electronic data centers? That is what the court will decide," he said.
"A broad and widely influential definition of 'trading floor' that includes electronic systems could open the way for novel interpretations of other old rules and contracts, leading to litigation," he added.
In the old days, Prof. Angel noted, exchanges used to be clubhouses where members traded. "They bought memberships for access to the trading, not for a piece of the exchange's profits."
He said that technology changed, and the old exchanges have become technology companies.
"When the exchanges demutualized, they cut deals to buy out the old members. The exchanges' only obligation to their old members is to live up to the deals that they cut," he concluded.
This isn't the first legal challenge brought by former members over CME's digital evolution. In April 2014, three floor traders—William C. Braman, John Simms, and Mark Mendelson—filed a federal class action in the U.S. District Court for the Northern District of Illinois: Braman et al. v. CME Group Inc. (Case No. 1:14-cv-02646).
The Braman plaintiffs alleged that CME violated the Commodity Exchange Act (CEA) by selling early access to market data to high-frequency traders, allowing them to see and act on price information before it became public. This "two-tier market," they claimed, harmed traditional traders and undermined market fairness.
That case was dismissed in December 2015 by Judge John Robert Blakey, who ruled that the plaintiffs failed to plausibly allege manipulation, artificial pricing, or any false information that would be actionable under the CEA.
